In the context of financial services, a non-collectable is a declaration by a creditor, such as a credit-card issuer, that an amount of debt is unlikely to be collected. For example, credit-card issuers often make the decision to declare an uncollected credit-card debt after six months of non-payment as non-collectable. Net non-collectable is the gross amount of debt declared non-collectable, less recoveries collected from earlier non-collectibles. For example, if a credit-card holder fails to repay on his $10,000 credit-card balance, the credit-card issuer can record a $10,000 loss. However, if the credit-card issuer later collects $3,000 from the credit-card holder failing to repay, then the net non-collectable charge off on the debt is $7,000, not $10,000 as originally recorded.
In an effort to reduce non-collectibles, financial institutions often rely on economic indicators. More credit is issued to consumers when economic indicators are good. Less is issued when they are bad. Methods for developing and applying economic indicators continuously evolve and vary from institution to institution and from financial market to financial market.
Generally speaking, an economic indicator is a statistic used to analyze characteristics of a particular market. Economic indicators fall into three broad categories: lagging, coincident, and leading. Lagging indicators are economic indicators that react slowly to economic changes, and therefore provide little predictive value. Generally speaking, lagging indicators follow an event because they are historical in nature. Lagging indicators demonstrate how well a market has performed in the past. This gives economists a chance to review their predictions and make better forecasts. For example, the unemployment rate is traditionally characterized as a lagging indicator. This is because unemployment represents previous personnel decisions and, as such, always lags behind current market conditions. For example, during the mid-1990s there was a spike in consumer credit losses in the United States, despite decreasing unemployment. Profit is another exemplary lagging indicator because it reflects historical performance. Customer satisfaction is another economic indicator that indicates historical performance.
Coincident indicators are economic indicators that change at approximately the same time and in the same direction as the relevant market. As such, they generally provide information about the current state of the market. For example, personal income, gross domestic product (GDP), and retail sales are coincident indicators. Coincident indicators are often used to identify, after the fact, the dates of peaks and troughs in the economy or sectors of the economy.
Leading indicators are economic indicators that predict future changes in the market. A leading indicator is one that changes before the market changes. Examples of leading indicators include stock prices, which often improve or worsen before a similar change in the market. Other leading indicators include the index of consumer expectations, building permits, and money supply.
Known economic indicators and methods of applying those economic indicators are not yet reliable or accurate enough to consistently predict changes in consumer non-collectibles. Such predictions would enable financial institutions to save billions of dollars by effectively and timely issuing and retracting credit. For example, financial institutions could issue more credit when net non-collectibles are predicted to decrease and issue less when net non-collectibles are predicted to increase.